Should I Combine My Pensions?

What does combining pensions actually mean?

Pension consolidation normally involves transferring money or pension rights from one pension arrangement into another.

For example, imagine you've changed jobs several times and accumulated:

• Pension A — £18,000
• Pension B — £42,000
• Pension C — £76,000
• Pension D — £135,000

These figures are purely illustrative.

You might consider transferring some of those pensions into one existing pension or another suitable arrangement.

Afterwards, instead of having four separate pensions, perhaps you have:

one or two.

That sounds wonderfully simple.

And sometimes simplicity is genuinely useful.

But the administrative tidiness is only one part of the decision.

Why do people combine pensions?

Usually because their pension cupboard has become a mess.

Different employers.

Different providers.

Different apps.

Different statements.

Different retirement dates.

Different investments.

And at least one pension provider that still seems determined to communicate exclusively by post.

Steve's observation

If you've changed jobs six times, it is entirely possible to reach your 50s with more pensions than you have matching socks.

So I completely understand the attraction of:

"Can we just put these things together?"

The answer might be yes.

But first we need to know what we're putting together — and what we're giving up.

Advantage 1 — It can make your pensions easier to manage

This is perhaps the most obvious benefit.

Instead of monitoring several providers, you may have fewer:

• statements
• online accounts
• investment funds
• beneficiary nominations
• and: retirement projections

to keep track of.

That can make it easier to understand your overall retirement position.

But don't confuse:

easier administration

with:

better pension.

One is a convenience benefit.

The other requires considerably more analysis.

Advantage 2 — You may get a clearer picture of your retirement savings

Imagine looking at:

£17,000, £31,000, £48,000, £12,000 and £96,000

across five providers.

Psychologically, they can feel like five unrelated bits of money.

Combining appropriate pensions can make the overall amount easier to see.

But you don't actually have to transfer pensions to achieve that clarity.

You could simply create a pension inventory.

We started doing exactly that in:

How Do I Find All My Pensions?

You can know that you have £204,000 across several pensions without physically putting £204,000 into one pension.

That's an important distinction.

Advantage 3 — Charges may potentially be lower

Different pensions can have different charges.

One old pension might cost more than another arrangement.

So consolidation could potentially reduce overall charges in some circumstances.

But:

compare the whole cost.

As we covered in:

How Much Am I Paying in Pension Charges?

you may need to consider:

• pension/platform charges
• fund costs
• administration costs
• transaction costs
• advice costs where relevant
• and: transfer or exit costs.

Don't compare one pension's headline AMC with another pension's total cost.

And don't transfer a pension solely because the percentage looks lower until you've checked what else you could lose.

Advantage 4 — You might have different investment options

Different pensions offer different investment choices.

Some provide a small range of ready-made funds.

Others provide a much broader investment range.

Some may have modern online investment tools.

Others may offer relatively limited investment choice.

But:

more investment choices do not automatically produce better outcomes.

If you have 3,000 funds and don't understand which ones are appropriate for your objective, the extra choice isn't necessarily helping.

Before judging investment choice, understand what you already hold.

That's what we covered in:

What Is My Pension Invested In?

Advantage 5 — Retirement might be easier to administer

Pension arrangements can provide different retirement options.

Some older pensions may not offer the same flexibility as more modern arrangements.

Depending on the pension, somebody approaching retirement might therefore consider whether their existing arrangements provide the options they expect to use.

But again:

different doesn't mean worse.

An older pension with fewer flexible-access options might also contain a valuable guaranteed benefit.

So retirement flexibility needs to be considered alongside everything else.

What's the downside of combining pensions?

This is the important half of the conversation.

Because consolidation isn't simply moving money between bank accounts.

A pension can contain contractual and statutory rights.

Transferring can potentially change or remove them.

Risk 1 — You could lose valuable guarantees

We covered this properly in:

Does My Pension Have Valuable Guarantees or Benefits?

An older pension might contain:

• a guaranteed annuity rate
• safeguarded benefits
• Guaranteed Minimum Pension rights
• with-profits guarantees
• or: other contractual benefits.

These can potentially be valuable.

And some may be lost on transfer.

Steve's observation

Saving £400 a year in charges is lovely.

Giving up a valuable guarantee to achieve it is less lovely.

So before celebrating what you're saving:

price what you're losing.

Risk 2 — You could lose protected tax-free cash

Some older pension arrangements can contain scheme-specific protected rights to tax-free cash exceeding the standard amount that would otherwise apply.

Transfer rules around those protections can be technical.

The important message is simple:

check before transferring.

Do not assume a protected entitlement will automatically follow the pension wherever it goes.

Risk 3 — You could affect a protected pension age

Some pension arrangements contain a protected pension age.

That can potentially allow the member to access benefits earlier than the normal minimum pension age that would otherwise apply.

Different protected-age regimes have different transfer rules.

A transfer may:

• preserve
• alter
• or: result in the loss of

a protected pension age depending on the protection and how the transfer is carried out.

If you have one:

check the rules before transferring.

Risk 4 — You might be dealing with a defined benefit pension

This changes the conversation significantly.

A defined benefit pension is not simply an investment pot sitting somewhere waiting to be moved.

It promises pension benefits under the scheme rules.

Transferring normally means giving up those promised benefits in exchange for a transfer value that is moved into another pension arrangement.

That can mean surrendering valuable secure retirement income and associated benefits.

So do not put a defined benefit pension into the:

"I've got four pensions, let's combine them"

pile without identifying it first.

We explained how to distinguish pension types in:

What Type of Pension Do I Have?

Risk 5 — Your current employer may be paying into one of the pensions

This sounds obvious.

But it's worth saying.

If your current workplace pension receives employer contributions, don't accidentally disrupt the arrangement without understanding the consequences.

Your employer may only make its normal workplace pension contributions to the scheme it has selected.

Moving existing money does not automatically mean future employer contributions will follow it.

So identify:

which pension is active

and:

where current contributions are going.

Risk 6 — There could be transfer or exit costs

Some pensions can have charges associated with transferring or exiting.

This is particularly relevant when reviewing older contracts.

Ask:

"Is there any financial penalty or charge if I transfer this pension now?"

Get the answer in writing.

Risk 7 — The new pension could actually cost more

People often assume consolidation means:

cheaper.

It doesn't.

Suppose you have an old workplace pension negotiated by a large employer at very competitive institutional rates.

Moving it into an individual pension could potentially increase costs.

Equally, another old pension might genuinely be expensive.

You have to compare the actual arrangements.

Not the age of the paperwork.

Risk 8 — You could change your investment risk without realising it

Imagine your old pensions hold:

different asset mixes

and:

different risk levels.

You consolidate them and choose one new fund.

You haven't just simplified the administration.

You've potentially changed the investment strategy for all that money.

That may increase or reduce risk.

Neither is automatically correct.

This is why:

How Much Risk Am I Taking With My Pension?

comes before this guide.

Understand the risk before changing it.

Do I have to combine every pension?

No.

This is one of the most important lessons in this guide.

Pension consolidation is not:

all or nothing.

It may be appropriate to consider:

some pensions

while leaving:

others exactly where they are.

For example, somebody might have several straightforward DC pensions plus an older arrangement containing valuable guarantees.

The existence of the guarantee doesn't necessarily prevent them reviewing the other pensions.

What about pension scams?

Transfers are an area where consumers need to be particularly careful.

Be suspicious if somebody:

• contacts you unexpectedly
• pressures you to act quickly
• promises unusually high or guaranteed investment returns
• offers access to pension money outside normal rules
• or: wants to move your pension into unusual or unfamiliar investments.

Do not transfer simply because somebody has told you there is a:

"limited opportunity."

Your pension has taken years to build.

It can survive another week while you check who you're dealing with.

Is pension consolidation reversible?

Do not assume it is.

Once a pension has been transferred and the old arrangement closed, contractual guarantees or protected benefits surrendered as part of that transfer may not be recoverable.

That's why the correct order is:

understand first

compare second

transfer last.

Not:

transfer first

discover guarantee afterwards

swear loudly.

How should I compare pensions before combining them?

For each pension, write down:

1. Pension type — DC? DB? Personal pension? Workplace pension?
2. Current value or benefits — What exactly do you own?
3. Current charges — What are you paying?
4. Investments — Where is the money invested?
5. Risk — How much investment risk are you taking?
6. Guarantees and protected benefits — Could anything valuable be lost?
7. Retirement options — What can the pension currently provide?
8. Transfer charges — Would leaving cost anything?
9. New pension costs and features — What would replace it?

Only then do we have a meaningful comparison.

A useful three-stage test

Before consolidating any pension, ask:

Stage 1 — What have I got? Identify the pension properly.

Stage 2 — What would I lose? Guarantees? Protections? Benefits? Charges? Investment features?

Stage 3 — What would I gain? Lower costs? Better administration? Different investments? More suitable retirement options? Improved visibility?

Then compare:

Gain versus loss.

That is the real consolidation decision.

What Should I Do Next?

Do not start by filling in a transfer form.

Start with a comparison.

For every pension, write down:

• What is it?
• What is it worth?
• What am I paying?
• Where is it invested?
• What risk am I taking?
• What guarantees or protections does it have?
• What would I lose by moving it?
• What would I gain?

Only when those questions are answered does:

"Should I combine my pensions?"

become a sensible question.

The next step in understanding that decision is to understand exactly what happens when a pension is transferred.

There is nothing inherently clever about having: one pension.

And there is nothing inherently clever about having: seven.

The right number is the number that makes sense for your circumstances.

Consolidation can potentially make pensions easier to manage, reduce duplication and sometimes improve costs or available options.

But simplicity isn't worth buying at any price.

Steve's observation

If five pension apps are driving you mad, I sympathise.

But:

"I don't like having five passwords"

probably isn't enough reason to surrender a valuable pension guarantee.

Understand what you've got.

Understand what you're giving up.

Understand what you're getting instead.

Then make the decision.

Got pensions scattered across different jobs and providers and wondering whether you should put everything in one place? Before transferring anything, compare the charges, investments, retirement options and — most importantly — any guarantees or protected benefits you could lose. If you'd like help understanding what you have and whether consolidation should even be considered, speak to Open Door Wealth.